US Strategy Weekly: Raising Estimates

We are raising our 2026 S&P 500 earnings estimate from $330 to $350 and our 2027 estimate from $382 to $400.75. These forecasts are in line with current consensus estimates and represent growth rates of 27.6% in 2026 and 14.5% in 2027. Note that in December 2025 we initiated earnings forecasts that were well above consensus and though we are only midway through the year, this is the second time we have raised our estimates.

Also note that 2026 and 2027 follow an earnings gain of 17.6% in 2025. This means these three years might generate a combined earnings gain of 59.6% which would represent the best period for S&P 500 earnings since 2009 (14.8%), 2010 (47.3%), and 2011 (15.1%) and their three-year gain of 77.3%. This earlier three-year period was also followed by another solid earnings increase of 10.2% in 2012. However, it also was preceded by the financial crisis of 2008 and an earnings decline of 40%. See page 15.

The drivers of the current earnings spurt began with the tax law change (One Big Beautiful Bill Act signed July 4, 2025, effective for the 2025 tax year) which allowed capital expenditures to be deducted in the same year as expensed. This stimulated capital investment. Equally important, it was coupled with a massive investment demand in AI infrastructure including, but not exclusive to, semiconductors, data centers, and utilities to support these data centers. Earnings are also improving as businesses find new efficiencies, i.e., margin improvements from implementing AI software. It has been a “perfect storm” for earnings growth. However, after four consecutive quarters of positive earnings surprises, we believe earnings surprises will become more difficult to generate in the second half of the year.

The second half of 2026 will certainly be impacted by the midterm elections; however, in July we expect the market will focus on 1.) the price of oil and 2.) second quarter earnings results. We expect earnings will be solid and supportive. If the price of WTI crude oil (CLc1 – $70.44) remains at $70 or less, we foresee a decline in headline inflation. This will help households in terms of lowering energy expenses and could lead to stronger-than-expected economic activity in the third quarter. It could also lead to lower long-term interest rates (helpful to the housing market) and higher PE multiples.

The 2026 stock market has been driven more by fundamentals than sentiment. For example, in the twelve months ending June 2026, the S&P 500 index was up 21% YOY and S&P 500 earnings were up 22% YOY. On page 3 we have two charts, the first with the S&P Index overlaid with actual 12-month earnings forecasts. The scale in this chart is 20 to one, or $50 of earnings equals 1000 points in the SPX. The second chart plots the SPX with a history of S&P 500 forecasted earnings multiplied by 21. Note that while both charts are similar, a PE of 21 is a much better fit to the S&P index than 20 times, and each breach below this level has been a buying opportunity for investors.

If oil remains below $70 a barrel, and inflation falls from the current 3.5% to 4.2% range to 3% to 3.5%, PE multiples could expand beyond 21 times. Even so, the current trend in earnings, without multiple expansion, suggests a target of roughly SPX 8350 in December 2026.

The charts on page 3 also show that the 2000 bubble top was preceded by two years of overvaluation. The December 2021 top was preceded by nine months of declining earnings, i.e., overvaluation. All in all, we do not believe the current market environment is bubbly or overvalued.

There are always risks. As we go to print there is news that the US has revoked the general license for Iran oil sales and is bombing Iran. We do not believe President Trump will authorize any destruction of Iran’s energy infrastructure, at least before the midterm elections, and if not, it should not impact the equity market. But despite the recent strength seen in retail sales and consumer credit, the job market is a concern.

The June BLS employment report was a disappointment with the addition of 57,000 payrolls in the month and revisions that decreased previous reports by 74,000 jobs. Most of this weakness was in the leisure and hospitality sector, which lost 61,000 jobs in June. The losses in leisure and hospitality seem inconsistent with the fact that the US is hosting the FIFA World Cup games from mid-June to mid-July. Since the games have attracted significant crowds from all over the world, it will be interesting to see if there is an upward revision to the leisure and hospitality sector with July data. See page 4.

The household and establishment surveys continue to diverge, and June’s household survey indicated a loss of 507,000 jobs and a decrease in the labor force of 720,000 workers. These huge decreases explain why the participation rate declined to 61.5%. However, the disparate trends in the household and establishment surveys continue to grow as seen on page 5. The six-month average job growth for the establishment survey is now 92,000 jobs; whereas the household survey shows a massive decrease of 288,000 jobs per month. Note that swings in household data have become more extreme in the last few years which makes us question the reliability of the data. Since the pace of job loss in the household survey is the equivalent of a recession, it is difficult to trust the data. See page 5.

On a more positive note, the misery index, which is the sum of inflation and the unemployment rate, is upbeat. This is a tool to demonstrate how favorable or hostile the economic environment is for the average household since it is directly impacted by inflation and employment. In June, the misery index eased from 8.5% to 8.4% and remains well within the normal range of 5.7% to 12.5%. Note that the last hostile reading was in June 2022 when inflation was 9.1% and unemployment was 6.7%. See page 6. 

After months of lagging sales, total vehicle unit sales rose 3% in June, up 4.1% YOY. And for the first time in a while, foreign vehicle sales rose more than domestic sales. Total foreign vehicle sales increased 10.7% YOY, led by imported trucks which rose 14.6% YOY. Domestic unit sales increased 2.6% YOY, led by domestic truck sales which grew a similar 2.6% YOY. See page 6.

The ISM services index decreased from 54.5 in May to 54 in June, but the employment index jumped to 51.2 and into expansion territory for the first time since February. The ISM manufacturing index eased from 54.0 to 53.3, but the employment index also rose from 48.6 to 49.7. The combined employment index is now at 100.9, the highest since February 2025. This is encouraging and again it suggests there are problems in the BLS household survey. In both ISM surveys the prices paid index fell, which is also positive news for future inflation. From a technical perspective, it is noteworthy that over the last 25 trading sessions, despite a string of all-time highs in the averages, the percentage of volume in advancing stocks has only exceeded 50% seven times. This means there has been significant selling into strength in the June-July market. In sum, the recent rally has not been impressive, and we would not be surprised to see a correction or sideways market in the near term. Even so, we remain a buyer on weakness.  

Gail Dudack

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